All posts in category Property

ASIC and the ATO have on numerous occasions highlighted the dangers of buying property through one organisation that organises all steps in the process. they call them “one-stop-shops”. This is where you get all or most of the following services for a new SMSF from one associated group:

Property Adviser who does initial training or introduction to property investing, then pointing you to associated service providers

Accounting and Audit to set up and do the admin for your new SMSF

Financial Planner to prepare a Statement of Advice on the suitability, risks, costs, benefits of and SMSF and benefits lost in moving to an SMSF

Conveyancer to process the property transaction

Mortgage Broker to sort out the finance

One of the issues is that they may not be very transparent about how they’re interconnected. Always ask each party what their fees are and do they pay any form of remuneration, fees, referral commission charges etc to any other party.

SMSF property one-stop shops

397 – “The use of property one-stop shops is an area of significant concern. These models tend to promote the purchase of geared residential property through an SMSF, arranged by groups of related real estate agents, developers, mortgage brokers, accountants and financial advisers.

398 – The one-stop shop model creates inherent conflicts of interest that may affect the advice given to a client to set up an SMSF, make subsequent investments, or use specific services. These conflicts can arise from direct or indirect commissions, referral payment arrangements, representative remuneration structures or even management pressures.

399 – We have previously achieved enforcement outcomes against operators of property one-stop shops involving SMSFs—such as Park Trent PropertiesGroup Limited and Anne Street Partners. In light of the findings from this project, we will continue to conduct surveillance on these property one-stopshop operators and take enforcement action where appropriate.

400 – We will also work with other regulators, including the ATO and APRA, to develop a holistic approach to addressing problems that we are seeing with property one-stop shops.”

Despite these warnings ASIC’s further research has shown that people still value the idea of a One-stop-shop for their advice needs when buying property. I assume this is because people just like simplicity and want someone to manage the process for them. Well you can have that simplicity without the inherent dangers involved by choosing to work with professionals who charge a fee for service for their advice and do not accept commission or any remuneration from other parties or fully disclosed like such as with a Mortgage Broker who is remunerated by the lender.

So when thinking about a property for your Self Managed Superannuation Fund or any asset really, you should always ensure that at least some of the providers of services are working in your Best Interests. Financial Planners are obligated by law to act in their Client’s Best Interest but we all know that money , fees or commissions may blur the lines. So don’t be afraid to ask questions about:

who is providing you the advice

how are they being paid,

Are they receiving any other form of remuneration

how are they connected to the other service providers

It is important for your professional service providers to work on strategies on your behalf but that does not mean they need to be paying fees to each other which ultimately increases your costs. Let me explain how I work with other professional service providers for example:

I do not provide specific advice on “the property” for you and stick to my area of expertise; whether an SMSF is right for you and how you can use it to achieve your goals. I charge you a specific fee for this advice which is outlined in a Letter of Engagement before you commit to my service. If you want ongoing advice, again I explain it up front in an Ongoing Service Agreement.

I provide you with a range of SMSF Admin and Audit solutions from other providers that will suit your needs. I have 4-5 options to ensure you can choose what suits you with our guidance and often that may be to use your current Accountant. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients

If people want help choosing a property, again I have a number of trusted Buyer’s Agents throughout the country that are on hand to provide advice. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.

If you need assistance in getting finance arranged then I refer you to a number of brokers who have experience and expert knowledge in SMSF Lending. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.

Legal Advice/Conveyancing – If you do not have a current lawyer or they do not have SMSF experience then I refer clients to a number of lawyers / conveyancers with specific experience and expertise in the rules around SMSFs for property transactions, powers of attorney and estate planning.

I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.

Can you say the same about your service providers?

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I love working on strategies for clients but sometimes you just need a true expert or excellent software to crunch the numbers. I was looking for some ideas on downsizing as it had become clear to me that is was not the panacea to retirement funding that client’s often believe it would be. So I was looking for an in-depth article working through the numbers and Rob van Dalen of Optimo Financial has kindly stepped up to provide the required analysis in our latest guest blog. Rob’s main warning is to do your sums on your own particular situation before leaping in to a downsizing strategy.

Do Your Sums Before Downsizing

A popular subject often talked about at family barbecues is; “should mum and dad downsize when they get older?” Often it’s assumed that downsizing is the best option moving forward. To test and possibly challenge this we decided to run a few scenarios through our Pathfinder Financial Optimisation Platform to find out. Read our findings below;

1.1 The Clients

In this example, we look at the case of David and Alice who have recently retired and who will soon both be eligible for the age pension. David was born on 11 April 1953 while Alice was born on 15 November 1952. They have a modest $400,000 in super. Their other assets are the family home valued at $900,000 and personal assets valued at $40,000. They have no debt. They would like to have $50,000pa (increasing at CPI) for living expenses. They are worried that their super is not sufficient to maintain their desired income. Consequently, they have contemplated selling the family home and moving to a cheaper area where they could buy a new home for $500,000. Will downsizing leave them better off?

1.2 Assumptions

We have assumed in the analysis:

· Pension fund returns 5.7%pa;

· House selling costs 2.5%;

· House purchase costs 6% (including stamp duty);

· House prices in the long term increase at 3%pa;

· CPI 2.5%p.a.

1.3 Scenario 1: Retain Current Home

We first examine the scenario where David and Alice retain their current home. In this case, they will receive income from the government pension as well as drawing a pension from their own super. Figure 1 shows the sources of their income over a 20 year period.

David and Alice receive approximately 64% of their income from the age pension and associated benefits (see also Figure 6 below). The remainder is withdrawn from their pension account through withdrawing the minimum amount each year (plus some extra for the first few years until they become eligible for the age pension).

Their age pensions are limited approximately equally by the income and assets tests. After 20 years, David and Alice have a combined wealth of $1,960,000 most of which is from the family home.

1.4 Scenario 2: Downsizing Family Home in 2016/17

The next scenario sees David and Alice downsizing their family home from $900,000 to $500,000 in 2016/17. Their ages enable them to deposit the excess funds generated from the house sale into super as non-concessional contributions. However, a Pathfinder® analysis shows that increasing their superannuation balance reduces their age pension because, unlike the family home, super counts towards the age pension assets test and is deemed for the income test. Figure 2 shows the results of the age pension assets and income tests for David and Alice and we can see that their pension is now limited by the assets test. For a home owning couple, the age pension reduces at a rate of $3 per fortnight for each $1,000 of assets in excess of $575,000. This taper rate was doubled from 1 January 2017, so now has a much larger impact on the pension received.

So in 2019/20, for example, their age pension reduces from $36,337 to $9,004 and they must draw more from their pension account to make up the difference. Their wealth after 20 years is now projected at $1,581,000 or about $379,000 less than in the first scenario.

1.5 Scenario 3: Downsizing Family Home in 2027/28

In the third scenario, we examine the possibility that David and Alice defer the downsizing for ten years, say in 2027/28. Their age pension is initially unaffected until they downsize the family home, but after that time their age pension payments are severely curtailed. Their projected wealth after 20 years is now $1,714,000. This is a better outcome than in the second scenario but is still $246,000 less than if they keep their existing home.

1.6 Comparing the Scenarios

Figure 3 gives a comparison of the annual age pension received in the three scenarios. You can see that the scenario where they retain their current home, yields a higher pension and that their pension drops sharply after the sale of their house in the other two scenarios.

Figure 4 shows the total age pension payments over the 20 years. You can see that by keeping their original family home, their total pension entitlement is significantly higher than either of the downsizing options we analysed.

Figure 5 shows the total wealth over the 20 year period analysed.

The first point to note is the importance of the age pension towards retirement income, depending, of course, on the particular circumstances. Figure 6 shows the composition of retirement income over the 20 years analysed for Scenario 1.

1.7 Conclusions

In this example, the age pension plus estimated concession card benefits contribute about 64% to income while the account based pensions contribute about 36%. The second point is that downsizing the family home may not result in improving the overall situation as an increase in payments from a private pension may be more or less offset by a decrease in the age pension.

1.8 Pathfinder Learnings

In our Pathfinder® analysis, we find, perhaps surprisingly, that a couple could be considerably worse off by downsizing the family home. Any funds added to super by the income generated from downsizing could be dissipated by a reduction in the age pension. In addition, the costs of sale and repurchase of a family home are significant.

The age pension can provide a buffer between retirement savings and lifestyle expenses.

For persons eligible for the age pension, downsizing the family home may leave you worse off financially because of the impact of the age pension income and assets test.

Thank you Robby

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

So you have heard you can buy an investment property with your superannuation? Here is some general information and pros and cons of property in an SMSF. I have also provided links to more comprehensive information on the strategies most often used.

People have been using their superannuation to buy property in their SMSF for decades now but it really came to the fore when SMSFs were allowed to borrow to buy assets in 2007 and when this was given more clarity in terms of borrowing to buy residential property in 2010.

Investing in property within superannuation is not as straightforward as investing outside the superannuation environment and you need to do your homework. Buying property through super can be great way to invest for retirement but it’s probably most suitable for people who are only 15 to 25 years away from it. Not only do they probably have 20 years or more contributions and hence sufficient balances for a deposit at their disposal, they are also more likely to be able to hold the property until after retirement to realise the best of the tax savings.

I have also provided some more detailed general guidance on specific strategies and the implementation process on my Property in an SMSF page.

Property Investment in an SMSF:

People are able to combine their superannuation accounts in to an SMSF and use then are able to buy both residential and commercial property with or without the support of a mortgage from a lender.

However it’s important to note that all investments need to be in the best interests of fund members and meet the Sole Purpose test of superannuation and the legislation dealing with this topic.

So please make sure that any property investment has an income stream and realistic prospects for capital growth. Overall, an SMSF investment strategy needs to take into account the personal circumstances of all the fund members, including their age and risk tolerance and needs to consider:

diversification (investing in a range of assets and asset classes)

the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)

the fund’s ability to pay benefits (when members retire) and other costs it incurs

the members’ needs and circumstances (such as, their age and retirement needs).

the steps that will be taken to insure the members and protect their retirement savings.

What you should make clear in the investment strategy:

When it comes to purchasing any investment asset through a SMSF, the Australian taxation office (ATO) provides the following guidance:

Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis.

The investment must meet the sole purpose test of providing retirement benefits to fund members.

In terms of property, this means that the purchase cost and sale price – as well as the rental income – must reflect a true market rate of return. It also means that you usually cannot buy the property from – or sell the property to – someone associated with any of the Fund’s members. This is called a “Related Party” transaction.

It also means that neither you nor anyone associated with you can receive any personal benefit of holding the asset. (more on this below)

So what are the pros and cons of holding a property in Superannuation?

Pros

Combined investing as a couple or family:. Your personal savings outside superannuation – or even your individual account balance(s) within superannuation – may not be enough to meet the deposit requirements of a direct property. Combining your account balances with the other members of your family, though, may give you the purchasing power you need to invest in a large asset.

It can be tax-effective. Superannuation receives concessional tax treatment on assets used to save for retirement. The earnings within your superannuation fund are taxed at only 15% with a 33% discount for assets held more than 12 months (i.e 10% CGT)– which is most likely less that your marginal tax rate. The big bonus is if you hold on to that property until retirement the earnings within the pension phase are tax-free. That is on the rent if you keep the property or the sale proceeds if you sell it. (subject to the $1.6m pension transfer limit per member from 1 July 2017).

Making repayments from pre-tax dollars. If you can afford to save and have room within your concessional contribution limits then you can salary sacrifice additional income to super to pay off the loan quicker from pre-tax dollars. So paying 15% on salary sacrifice and then making additional repayments rather than paying your marginal tax rate on the income and saving it outside super.

Supporting Business growth . While the rules prevent you purchasing a residential property from yourself or a related party, you can buy a commercial or industrial property (know as Business Real Property) to lease back to your own business – provided you pay a current market rate of rent. This helps free up funds to grow the business.

The feel of Bricks and Mortar! – providing more control over your investments. Many SMSF investors appreciate having control over the investments they buy and the ability to “value add” to their property investments via renovation or development (See more detail in SMSF Borrowing: What Can I Do With An Investment Property Within The Rules. there is no substitute for that feeling when you have a real understanding of where your money is invested.

Cons

Big lumpy illiquid asset. Diversification – the wise move of not having all your eggs in one basket is more difficult to achieve if your SMSF owns just one or two large assets. That lack of diversification may not be in the best interests of the SMSF members especially across generations. The old adage “You can sell off a bathroom when you need cash” comes to mind so make sure you plan your “what if strategies” and look at insurance, cash buffers and especially the funding of future pensions upfront.

Set up costs are higher. There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF with lenders. As always set up costs should be balanced against long term benefits of the strategy. Because of the costs buying property through a SMSF is generally only suitable for funds with $200,000 or more.

Not great for Negative Gearing. If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund taxed at only 15% – not at your marginal tax rate on your regular income.

You cannot benefit personally from the property. Investments within a SMSF must be purchased via an ‘arm’s length’ transaction and must be maintained on a strict commercial basis. As such with a residential property, you cannot purchase from, lease to, or rent to a related party. The ATO advises that one of the most common breaches of the sole purpose test is in assets that provide a pre-retirement benefit to a member or associate. Some examples of a breach would be using a SMSF property as a personal holiday house, or renting a SMSF property to a family member.

You must be certain of future cash flow. Firstly you must expect to have to provide a higher deposit than if borrowing directly. While you can borrow to buy property within a SMSF, you cannot borrow to build or improve the property. Ensure that your level of contributions, plus the rental income, will be enough to cover any costs that you will need to meet from cash. Think seriously about having decent Income Protection insurance as well as Life and TPD insurance for the term of the loan. Again, a cash buffer is essential.

Liquidity at retirement. When your superannuation transfers to the pension phase you will need to ensure that you have built up a sufficient amount of cash to fund the required pension payments without risking a fire sale of the property. This can range from 4% of the pension member’s balance before 65 to 5% from 65-74 and upwards from there.

There are many tips and traps to be aware of when it to comes to investing within a SMSF that I have done over 14 separate articles on the subject and all are available free on my blog at www.smsfcoach.com.au . So do some reading and your own research and please ensure that you get professional advice on your own circumstances, and assistance either via our team or your own advisors before you set up your fund or start the strategy.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Like every strategy we discuss with clients we stress that have to look at the exit strategies up front rather than scramble to react if something happens that changes the financial position of the members or of the fund.

While a self managed superannuation fund can increase its assets and leverage the potential growth by borrowing to purchase a property, that borrowing can also cause financial distress if a fund member dies or becomes disabled. The lack of liquidity and cash flow could force the trustee to:

Sell the property in a difficult or dropping market

Realise capital gains or losses before expected i.e. before the members are in pension phase

Have to deal with increased transaction costs.

Since August 2012 Trustees of an SMSF have been required to consider insurance for members and we would say that is very sensible when debt is involved.

The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

for a self managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund

In the past strategies like Cross insurance on each member of superannuation fund was often used to reduce the impact that the sudden death or disability of a member may have on a fund however the ATO have ruled out many of these strategies including using the SMSF to fund Buy-Sell Agreements between business partners.

SMSF mortgage repayment solutions on death

If there is life insurance on the member that dies then any proceeds are added to their account balance and can be paid as a lump sum out of the fund to beneficiaries but that may leave a fund a debt still to be paid off and with less contributions going in as one member is deceased and the fund may not have the free cash-flow to fund the full balance pay out without selling the property.

The strategies outlined below are those now available as to manage the cash-flow liquidity issues and death benefit payment requirements that have arisen when a fund member dies suddenly, whilst the fund still has a Limited Recourse Loan Arrangement in place.

Payment of insurance benefits as an income stream to spouse

If it is 2 spouses or defacto’s that have set up an SMSF and borrowed to purchase an investment property, life insurance is often used to extinguish the debt. The reason for this is that generally the disability or death will eliminate or reduce the level of contributions that are made for the member, from which the loan repayments have been sourced.

Where the members of a fund are spouses then death benefits can be paid as an income stream. This means that even if a fund has borrowed to purchase a property, the property does not need to be disposed of to pay out the death benefit. This is even more important if your business is run out of the property.

In this case the life/TPD cover can be held by the member covered by the insurance and the premium can be paid from that members account. These arrangements comply with the SIS Regs, and the policy can be held through the self managed fund.

If the member dies or becomes disabled, the proceeds will be credited to the affected member’s account and loan will be repaid. Following the repayment of the loan a pension will commence to be paid to the member in the event of TPD or to the spouse in the event of death. If under 65 they can take as little as 4% per annum to keep as much in the fund as possible.

Example: Tax Dependants like spouses

Jack and Diane are married and members of Mellencamp Family Super Fund (“SMSF”)
Account Balances:
Jack – $100,000
Diane – $100,000
SMSF took out a loan of $300,000 to acquire property valued at $500,000

Jack dies after getting a bad knock playing football ( for the younger readers get the full story here

anyway thank you for indulging me and now back to the example:

SMSF Cash flow after Jack’s death

The loan is paid out.

Diane starts a minimum 4% annual death benefit pension. Only one member left contributing now but no interest to pay.

Rent

$17,500

Concessional contributions

$5,000

Total inflows

$22,500

Interest

$0

Operating costs

($2,000)

Life premiums

$0

Pension

($16,000)

Total outflows

($18,000)

Tax

($675)

Net cash flow (surplus)

$3,825

what are the tax implications of the pension

Age at Death

Type of Super Death Benefit

Age of Recipient- DEPENDANT

Taxation Treatment of Taxed Element

Any age

Lump Sum

Any age

Tax free

60 & above

Income stream

Any age

Tax free

Below 60

Income stream

60 & above

Tax free

Below 60

Income stream

Below 60

Marginal rate of tax less 15% tax offset

To implement the strategy, the following factors, need to be considered:

The funds trust deed must permit the fund to hold the insurance and to pay the TPD or death benefits as an income stream

The fund’s investment strategy should state that the trustees have considered the needs of the individual members and determined to take out life insurance for the fund members in order to repay any outstanding mortgage under an LRBA

Whether the fund’s cash flow allows for the taking out of the insurance policies. The premiums will normally be deductible in this circumstance as the benefits can be paid as a pension. For younger trustees you should consider Level Premiums and reviewing the cover as the loan is paid down.

Funding benefits from a reserve

If a fund is not able to pay a death or disability benefit in the form of a pension because they don’t have a spouse or the fund trust deed does not permit the payment of a benefit as a pension, then it may need to consider the use of a reserve strategy.

This strategy involves the fund trustee taking sufficient TPD and death cover over the lives of the fund members to enable the repayment of a loan and the payment of benefits as a lump sum.

The fact that the insurance policies are paid from the fund’s reserve and the insurance proceeds in the event of an insured event are credited to the reserve, means that the insurance benefit can remain in the fund. The fact that the insurance proceeds can remain in the fund means that insurance liabilities can be met and the loan repaid without the asset purchased under the borrowing arrangement needing to be sold.

In order to implement the strategy effectively, insurance policies premiums for each of the fund members will need to be paid from the reserve. The fact that the premium is paid from the reserve will then require any insurance proceeds after an insured event to be credited to the reserve.

Example 2 – Non- Tax Dependants – 2 brothers in a business

So sadly Brad dies …big ahhhh!

SMSF Cash flow after Brad’s death

Death benefits are held in a Reserve.

The loan is paid out but the value is held in the reserve account

Results in large reserve ($400,000)
allocate back to Brian < 5% of his balance p.a. or
allocate up to $30,000 p.a. this year but only $25,000 going forward to Brian’s account depending on other concessional contributions in year

Rent

$17,500

Concessional contributions

$10,000

Total inflows

$27,500

Interest

($18,000)

Operating costs

($2,000)

Life premiums

($1,500)*

Pension

$0

Total outflows

($21,500)

Tax

($900)

Net cash flow (surplus)

$5,100

* Deducted from general fund expenses

Other Issues to consider

There are a number of other issues that fund trustees will need to consider when implementing this strategy:

If the members of the fund are business partners rather than spouses, the spouse of the deceased member may feel that the business partners are benefiting from the death of their spouse. It is really important to discuss these strategies upfront with family so they know they are provided for but that the business needs stability too.

When the insurance proceeds are credited to a reserve, it may be difficult to transfer that reserve back to fund members without exceeding the excessive concessional contributions cap.

The insurance premiums are not tax-deductible under Section 295-465 of the ITAA 97 because the policy is not held for the purpose of providing a fund member with a death or disability benefit.

The cost of the insurance premiums could be very high so seek advice on all possible solutions.

The cost of the insurance premiums may limit the trustee’s capacity to take out other insurance cover for members

What happens if a trustee fails to address insurance in their SMSF?

A person who suffers loss or damage …may recover … against that other person or against any person involved in the contravention. – Section 55(3) SIS Act

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

The ATO have issued long-awaited guidelines providing SMSF trustees with suggested ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.

By implementing these “Safe Harbour” loan terms, SMSF trustees are assured by the ATO Commissioner that

..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purelybecause of the terms of the borrowing arrangement.

It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs) be reviewed prior now extended to 1 Jan 2017

Where has this come from?

The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender – where the terms of the loan were not deemed to be on commercial terms.

These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.

NALI is taxed at the top marginal tax rate, currently 47% – regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15% or in pension phase when the income would usually be tax exempt.

After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.

The Nitty Gritty Details of the Safe Harbour Steps

The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.

The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.

Broadly, this PCG outlines two ‘Safe Harbours’. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm’s length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.

The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.

Original loan – 15 year maximum loan term (both residential and commercial).

Re-financing – maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).

Fixed interest rate loan:

Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

Variable interest rate loans:

Original loan – 7 year maximum loan term.

Re-financing – maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.

Fixed interest rate loan:

Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.

Loan-Value –Ratio

LVR

Maximum 70% LVR for both commercial & residential property.
Total LVR of 70% if more than one loan.

Maximum 50% LVR.

Total LVR of 50% if more than one loan.

Security

A registered mortgage over the property.

A registered charge/mortgage or similar security (that provides security for loans for such assets).

Personal Guarantee

Not required

Not required

Nature & frequency of repayments

Each repayment is to be both principal and interest.

Repayments to be made monthly.

Each repayment is to be both principal and interest.

Repayments to be made monthly.

Loan Agreement

A written and executed loan agreement is required.

A written and executed loan agreement is required.

Information sourced from Practical Compliance Guidelines PCG 2016/5.

Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.

A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.

The borrower is the SMSF trustee.

The lender is an SMSF member’s father (a related party).

A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.

The loan has the following features:

the total amount borrowed is $500,000

the SMSF met all the costs associated with purchasing the property from existing fund assets.

the loan is interest free

the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so

the term of the loan is 25 years

the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and

the loan agreement is in writing.

Consistent with ATO ID 2015/27 and ATO ID 2015/28, the LRBA is not considered to have been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, will give rise to NALI.

At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.

To avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.

Option 1 – Alter the terms of the loan to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).

To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:

The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).

Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.

The loan term cannot exceed 11 years from 1 July 2015.

The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.

The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.

The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the $49,900 capital repayment, into account.

After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.

For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option 2 – Refinance through a commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Option 3 – Payout the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Each option will have many advantages and disadvantages – so it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation

Important Note to 13.22C or Unrelated Unit Trust Investors

The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.

Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.

UPDATE (Relief for those caught by Budget measures)

In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:

where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and

where additional contributions are made in order to comply with the Australian Taxation Office’s (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.

Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Click here for appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I am not a lawyer but am constantly required to advise clients to get professional commercial or retail leases in place for properties they own in their Self Managed Super Fund and lease back to a related entity or a third-party. I was looking for some ideas on what to tell clients to look for in a proper lease agreement and Ian Macleod of R.P. Emery & Associates has kindly stepped up to provide our latest guest blog. So here are some greats tips and traps when leasing commercial property and remember you must establish a related lease on commercial terms and at arm’s length so while some issues may seem irrelevant, they become very important in proving to the Auditor that it is a commercial arrangement.

Ian Macleod -R.P. Emery & Associates + DIY Legal Kits

If you have purchased a commercial property with your Self Managed Super Fund, you will want to take all steps available to protect your valuable asset.

Here we’ve put together some of the most common traps faced by landlords when leasing commercial premises. We also offer some tips and guidance on how to safeguard and protect your investment property when leasing commercial space.

Obviously not all of these issues will apply if your business entity is leasing the commercial space back from your SMSF.

Research your tenant

Many problems can be avoided at the outset by properly researching your tenant and eliminating any undesirable candidates.

It is a lot easier to research your tenant before committing to lease the premises, than it is to deal with a problem tenant down the track.

Here is a list of standard searches and identification documents that a prudent landlord will request before signing a potential tenant to a lease:-

Credit check;

Bankruptcy search;

Photo ID such as passport and drivers licence for each tenant and guarantor;

Copies of tax returns and bank statements;

Company search (if the tenant is a company);

Details of prior business experience and financial viability;

Referrals from past landlords – pick up the phone and speak with previous landlords of the tenant.

Once you have collected the above searches and enquiries on a potential tenant, you will quickly start to build an impression of whether the tenant is an appropriate candidate for your premises. If any alarm bells ring, you should either request further clarifying information or move on to the candidate.

Is this a retail or commercial lease?

First step is to determine with certainty whether the leasing arrangement is a Commercial or Retail Lease. If it’s a retail lease it will be governed by the Retail Leases act that exists in each Australian state or territory. If it’s a straight commercial lease there is far less regulation.

State the parties correctly on the lease

The accurate identification of the parties on the lease goes to the heart of your agreement. Ensure that the tenant and any guarantors are correctly identified on the lease and match the spelling of the tenant’s individual or company names with copies of identification that you should have requested at the outset.

List any outgoings, costs or charges in the lease

Will you require your tenant to pay any additional costs in relation to the premises over and above the rent amount? These costs are called ‘outgoings’ and include things such as government rates and charges, security costs, maintenance charges, garbage disposal/collection fees, cleaning fees, air conditioning maintenance, elevator/escalator charges, etc.

If you are intending to charge your tenant outgoings, you must specify the outgoings in your lease otherwise you won’t be able to collect them.

Some landlords prefer to lump all of the lease costs together in the base rental amount, but others may prefer to charge tenants separately for any outgoings that may apply.

If your lease is for retail premises, you will also need to set out any outgoings in the Disclosure Statement given to the tenant before the lease is signed.

Guarantors

Guarantors are the individuals who guarantee the tenant’s obligations under the lease. They agree to be responsible for any loss or damage caused by the tenant.

As a landlord it is ideal to secure a guarantee, particularly if the tenant is a company.

If a tenant company defaults on a lease, the directors who stand behind the company will not be personally liable. This is due to the ‘limited liability’ of the company, which is seen as a distinct legal entity in its’ own right.

If the tenant is a company, it is strongly recommended that the directors are added to the lease in their personal capacity as guarantors. You must ensure that they sign the lease both in their capacity as the directors of the tenant company and in their personal capacity as guarantors.

Security deposit or bank guarantee

It is important to take security in the form of a cash deposit or bank guarantee, to adequately safeguard your investment should things turn sour. If the tenant defaults under the lease, you can draw on the security deposit or bank guarantee for any losses or damages due to the tenant’s breach.

Make sure the tenant has provided you with the security deposit (or bank guarantee) before they take possession of the premises. The tenant will quickly lose motivation to provide the security once they are in the property.

If the tenant is providing a bank guarantee, they should speak to their bank as early as possible in the negotiations, as there is often a wait for bank guarantees to be drawn up.

Permitted use

Give some consideration to a well worded permitted use definition in your lease. If you don’t provide some boundaries as to how the tenant may use your premises, you may find yourself uncomfortable with how your premises is being used.

While a well worded ‘permitted use’ definition will give you control over how the tenant is using your premises, if overly tight or restrictive, then the tenant may not have enough scope to organically grow and expand their business. In this regard, your permitted use definition should balance the needs of the tenants and give them room to grow or expand their business activities over time if they choose to do so.

Increasing the rent over time

If you are intending to review the rent over the term of the lease, then you will need to make provision for this in your lease. Make sure that you state the intervals at which the rent will be reviewed and the method by which the rent will be adjusted.

Common methods of rent review are: by reference to the movement in CPI, by a fixed percentage (e.g. 3%) or by a fixed amount (e.g. $100). The frequency by which the rent can be adjusted also needs to be stated, for example, on each anniversary of the lease start date, or every 3 years, etc.

Unless specified in your lease, it is unlikely you will be able to increase the rent throughout the term of the lease. If your lease is for retail premises, you will also need to specify the details of any rent reviews in the Disclosure Statement given to the tenant before the lease is signed.

Insurance cover

If you require the tenant to take out specific types of insurance cover over the premises, you must state so in the lease. Examples are:-

stock, furnishings and plant and equipment insurance;

legal/public liability insurance; and

plate-glass insurance.

Your lease should require that the tenant provide copies of all up to date insurance policies to the landlord at the start of the lease and on renewal of the policies.

Retail premises lease: give the appropriate documentation to the tenant

Each state and territory will have a specific definition but as a general rule if your tenants are selling or hiring goods or services direct to the public, then the lease will be a ‘retail lease’.

Retail leases come under state specific retail leasing legislation. When beginning lease negotiations for a retail lease and before the lease is signed, you will need to give your tenant a Disclosure Statement outlining the key aspects of the lease, and a copy of the proposed lease.

Once the lease has been signed by the parties the landlord is required to provide the tenant with a full copy.

Be aware that if the Disclosure Statement is not given, or if it contains false or misleading information, then the tenant will have the right to terminate the lease within a certain time frame.

Monitor the tenant’s performance of lease obligations

It is important that you actively monitor your tenants’ performance of its obligations under the lease during the lease term.

Dealing with breaches and where necessary, terminating the lease, can be a drawn out process. As such, it is important that you identify any breaches as soon as possible so that you can begin the process of having the tenant rectify the breach and if necessary, terminate the lease.

Addressing breaches early will ensure that any losses due to unpaid rent or damages, are kept to an absolute minimum.

Monitor:-

Rent payments – make sure rent is paid on time and at the correct amount;

The physical condition of the property – frequently inspect the premises to identify whether the property is being adequately maintained in good state of repair (fair wear and tear accepted);

The use of the property – is the tenant using the premises as permitted. Make sure the tenant is not using the premises for an illegal or dangerous purpose.

Overdue rent payments or damage to property can quickly add up, so it is imperative that you actively monitor your tenant and your property throughout the lease term.

Keep up to date with repairs and maintenance

Keep up-to-date with your responsibilities under the lease – especially with regards to repairs and maintenance of the premises.

This not only ensures a happy tenant and helps to maintain a harmonious relationship between landlord and tenant – it also goes towards maintaining and increasing the value of your valuable investment.

Make sure your lease has an appropriate exit clause

Even if you have taken every precaution available, sometimes things still don’t work out. In this regard, it is worth asking yourself at the outset: what happens if things go wrong? Will I be able to end the lease early?

If your tenant is causing you problems, stress and costing you money, an effective exit clause in your lease will enable you to end the lease promptly and efficiently.

Most leases specify that the lease can be ended early if an ‘event of default’ occurs. Common ‘events of default’ include:-

Non-payment of the rent for 14 days or more;

Breach of the lease;

If the tenant becomes bankrupt or insolvent.

Generally, before you can terminate a lease, you will need to give the tenant notice of any breach, and a reasonable time to rectify the breach.

Use the appropriate termination procedure to end the lease early

If the tenant defaults under the terms of the lease, don’t rush in like a bull at a gate and re-take possession of your premises. You still have certain obligations to the tenant, such as giving the tenant quiet enjoyment, which must still be adhered too.

Should the tenant breach the lease, you must follow the procedure set out in the lease and comply with your obligations at law.

Generally, you need to give the tenant notice of the breach and allow them a reasonable period of time to rectify the breach before terminating the lease.

Your notice should identify the breach, identify the steps to be taken to rectify the breach, and provide a reasonable time frame for the breach to be rectified.

Your negotiations with the tenant should be complete and the lease documentation finalised before the tenant is given possession of the premises.

A tenant is given certain rights at law at the time possession of the premises is granted. If the terms of the lease are not negotiated and finalised before the tenant moves in, then this can cause issues down the track.

Conclusion

These are some of the pertinent issues to consider when leasing a commercial space. Your obligations don’t end once you secure a tenant. As outlined above, you should be actively involved in your lease not only at the start, but also during the term of the lease and at the lease end.

If your business is leasing the property back from your SMSF, most of these potential issues will not be relevant to you.

However, you will still do need to conduct the lease transaction between your business entity and your SMSF on an ‘arms’ length’ basis on commercial terms as if it were between two unrelated parties. For this reason, you should still prepare a written commercial property lease or a retail lease.

Thank you Ian

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Immediately after I published my last blog Stamp Duty Requirements on Change of SMSF Trustees I got questions on stamp duty on property transfers to a Self Managed Superannuation Fund. At first I attempted to the answers myself but to ensure ongoing accuracy I am pleased to have Caroline Harley, one of the best lawyers in the SMSF sector review and update this information.

Caroline Harley | Special Counsel

So here is the current breakdown on stamp duty for property investors or small business owners looking to move property they own personally in to their SMSF.

Stamp duty imposed by State and Territory governments should always be researched and considered before transferring land to an SMSF. Concessions or exemptions from duty may be available depending on the State or Territory in which the land is situated.

This concession can be very significant. If the SMSF purchases NSW land/property from a member with a market value of $500,000, the duty which would apply (but for the concession) is $17,990. With the concession, the saving in duty is $17,490.

Reminder: the land/property must be business real property owned in the personal name of the member rather than a company (otherwise the trustee would not be permitted to acquire the real estate).

The provisions of the duties legislation of each State or Territory differ, however where concessions or exemptions are available they generally require the transferor to continue to be the beneficial owner of the land (this relates to business real property as it is the only land which an SMSF may directly acquire from a member).

The following tables set out the details of the stamp duty offices and relevant provisions of the relevant legislation in each State and Territory. This is up to date as at 27 February 2017.

NSW

Transfer to a SMSF

Duty payable

$500 subject to conditions being met. Previously $50 but increased 01/07/2014. Depending on the documentation in place for the transaction you may be able to apply for a retrospective re-assessment and obtain a refund. An SMSF specialist lawyer would be able to advise you on this.

Relevant provisions

62A NSW Duties Act 1997

General description of legislation

Nominal duty is charged on a transfer of dutiable property from a person to a trustee of an SMSF where the: transferor is the only member of the super fund or the property is to be held by the trustee solely for the benefit of the transferor (ie property or proceeds of sale of property cannot be pooled with property held for another member and no other member can obtain an interest in the property or proceeds of sale); and property is to be used solely for the purpose of providing a retirement benefit to the transferor.

Document-ation

Evidence that it is a complying SMSF as at the date of the agreement/transfer, copy of minutes of meetings of the SMSF stating the intention to have the property transferred to it and confirming that the property was owned beneficially by the transferor member, copy of the SMSF trust deed or a variation to it, showing a non revocable clause that the property is segregated for the transferor member’s benefit only (follows wording in section62A(2))

No duty is charged in respect of the transfer of dutiable property made without monetary consideration to a trustee of a super fund, where there is no change in beneficial ownership (again, property must be held in the personal name of the member and not a company name). A transfer of property to a trustee of a super fund by a beneficiary of the fund does not, for the purposes of this section, effect a change in the beneficial ownership of the property.

Document-ation

Documents are required – refer to ‘Evidentiary Requirements for Dutiable and Exempt Transactions’ on SRO website

Nominal duty is charged on a transfer of dutiable property by a person to the trustee of a super fund where –

▪ there is consideration for the transfer; and

▪ only the transferor can be a member of the super fund or the property is held in the superfund specifically for the transferor (ie property cannot be pooled with the assets of another member and no other members can obtain an interest in the property); and

▪ the property (or if sold, the proceeds) can only be held in the superannuation fund to be provided to the transferor as a retirement benefit.

If the fund subsequently fails to satisfy any of the requirements (above) full stamp duty is payable in respect of any dutiable property still held.

Nominal duty is charged under section 124 in respect of a transfer of dutiable property to the trustee of an SMSF that is an employer sponsored fund where –

A transfer of property to a person who takes as trustee is deemed to be conveyance whether or not any consideration is given (except in certain circumstances regarding the transfer of family farming properties)

Where the duties office is satisfied there is no change in the beneficial ownership of the property duty chargeable on the transfer is $50. Also an exemption is available in certain circumstances regarding the transfer of primary production land.

Document-ation

For primary production see ‘Documentary Evidence requirements Guideline’, for other transfers duties office reviews each transfer on its own facts recommend seeking confirmation of eligibility prior to lodgement.

Even more information and complimentary strategy ideas are available on our Property in a SMSF page. Contact Caroline for specific legal advice on your proposed strategy.

IMPORTANT

This information is current as at the date of publication but may be subject to change. This article is general in nature and has been prepared without taking into account a potential your objectives, financial situation or needs. Before making a recommendation based on this article, seek personal legal and tax advice and consider its appropriateness based on the your objectives, financial situation and needs.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

To cater for separate risk tolerances for member of a family rather than running segregated accounts

So more on uses of multiple SMSFs by property investors

Land tax is a form of taxation applied to the value of any land that an individual or entity may own. For an individual their primary place of residence is normally exempt from Land Tax. Depending on your state or territory, land is a very broad term that encompasses vacant blocks of land, commercial and residential properties. I will be talking about NSW in this article.

Facts on NSW Land tax 2015

The Tax Year Threshold Rate for 2015 is $432,000

Tax on land value above the threshold $100 plus 1.6% up to the premium threshold.

Premium Threshold is $2,641,000

Tax on land value above the threshold is $35,444 for the first $2,641,000 then 2% over that

Strategy to manage land tax:

Land tax can be minimised by taking advantage of land tax thresholds that apply per entity not in aggregation. So Land tax can be controlled through the use of a separate Self Managed Super Funds (SMSF) for additional properties once you reach the exempt threshold ; .

Currently the Land Tax Free threshold sits at a land value of $432,000. Therefore any land value that exceeds this can be taxed at a rate as high as 2%. However, each SMSF is treated as a separate entity meaning each SMSF has its own $432,000 threshold. This allows property investors to hold their land across multiple SMSF’s in order to never exceed the threshold in any of these funds and in effect become exempt from land tax.

Example:

Sharon and Robert through their Love Property Superannuation Fund own an investment property in Castle Hill with land valued at $402,000 as part of a diversified strategy of their Self Managed Super Fund. Intent on expanding their property empire the couple has recently received pre-approval for an investment loan to purchase an additional property in Rouse Hill with land valued at $413,000. With this purchase the Love Property SMSF would have a combined Taxable land value of $815,000 obligating them to $6,228 in land tax.

However on speaking to their “SMSF Association Accredited SMSF Specialist Adviser“ (Yes you guessed ME!), Sharon and Robert set up a second Self-Managed Super Fund, Love More Property SMSF to purchase the second property. This means the land owned in their first SMSF is below the tax threshold and the land in their second SMSF is valued at below the tax threshold which effectively exempts Sharon and Robert from land tax. Running a second fund can be done for less than $2,000 per annum so a net saving of $4,228 per year or at least $42,280 over a 10 year property buy and hold strategy.

So you can see that multiple SMSFs are an effective tool to boost the returns of your property investment.

If you want to know see more about property in a Self Managed Super fund the go to the page https://smsfcoach.com.au/property-in-a-smsf/ for articles that cover most of the strategies and questions on this subject including Tips and Traps to be aware of in advance.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Following on from my previous article How a SMSF can Purchase a Property with a Related Party – Using a 13.22c Trust , another strategy for those wishing to engage in property development with their SMSF involvement is for the fund trustee to invest in a unit trust that holds the development land / existing property by subscribing for units in the unit trust with partners so that no related entity group owns more than 50% of the units in the trust.

Where the fund trustee invests in an unrelated trust the trustee for the unit trust is not required to comply with the requirements of regulation 13.22C of the SIS Regulations. This means that the trustee for the unit trust can borrow to fund the land development without the fund trustee breaching the in-house asset rules in s71 of the SIS Act.

To make it very clear the unit trust will be unrelated if the fund trustee and its associates do not:

exercise Sufficient Influence; or

have a fixed entitlement to more than 50% of the income and capital of the unit trust; or

have the power to remove or appoint the trustee for the unit trust.

So each SMSF or related group of investors can own exactly 50% in combination between them and still maintain an unrelated trust and meet the above requirements.

Keep it simple as it is important that the units in the unit trust carry equal rights to income and capital so that you do not also trigger the non arm’s length income provisions under s295-550 of the Income Tax Assessment Act 1997 (1997 Act).

The diagram below shows 2 unrelated Self Managed Superannuation Funds investing in a unit trust equally (50/50) to carry out a property development. One of the SMSFs uses as related party loan to fund their purchase of the units. Remember it is only the units that are offered as security not the property in the trust.

Each SMSF contributes $350,000 and the property is developed for a total cost of $700,000 and sold for $1m. The$300,000 profit flow back through the Unit Trust to the unit holders equally.

Sufficient Influence

Where two unrelated SMSFs each hold 50% of the units in the unit trust, it is important that the trust management decisions are decided on a 50/50 basis. It should be very clear from documentation and minutes of the trust that decisions are made jointly.

How to avoid distributions to the SMSF being treated as non-arm’s length income?

Where the SMSF invests by way of a unit trust structure, any income received by the fund trustee may be treated as non arm’s length income and taxed at 47% under s295-550(5) of the Income Tax Assessment Act 1997 (1997 Act), where:

the parties are not dealing at arm’s length terms; and

the fund trustee receives an amount it would not otherwise have received if the parties were dealing on arm’s length terms.

Similarly, income the SMSF derives as a beneficiary of the trust, other than because of a fixed entitlement to income, will be treated as non arm’s length income and taxed at 47%.

Therefore, it is important to ensure that the unit trust is a fixed trust, meaning that the entitlement of unit holders to receive income and/or capital from the unit trust is fixed and indefeasible. However, even with a fixed trust it is necessary for the income to be no more than the income that would have been derived if the parties were dealing with each other at arms-length (s295-550(5)).

Managing powers of trustee appointment or removal

Again to avoid falling foul of the legislation, the constitution of the trustee company of the unit trust should be designed to ensure that the SMSF trustee and/or its associates do not have the power to control the trustee by effectively having the power to appoint and remove the trustee for the unit trust by reason that they hold a majority of the shares in the trustee. One trap is a constitution that allows the chairperson to have a casting vote where the chairperson is a SMSF Trustee or representative of the SMSF trustee.

Documentation

When the transaction is structured by way of an unrelated unit trust arrangement, the following documents should be prepared by an experienced legal expert (not off the shelf):

unit holders’ agreement all ensuring none of the requirements breached..

Gradual acquisitions of more units by the SMSF

Where a fund trustee invests in an unrelated unit trust the fund trustee may acquire the units held by the other party over time, subject to complying with the provisions of the SIS Act and keeping their related entity group to less than 50% of the overall trust units. Keep in mind that where the unit trust is land rich, there may be a corresponding stamp duty liability and there may be capital gains tax implications for the initial owner as well as valuation fees at each transaction date.

Remember the Sole Purpose Test

In the zest for undertaking any strategy I always remind clients about the reason for undertaking any investment. Your aim should be to provide for a better retirement. If that is not the core purpose then you are breaching the sole purpose test and should reconsider the whole strategy. Also you must review or amend your fund’s investment strategy to ensure this investment falsl within it’s guidelines..

Important information (emphasised for use of this material):

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial, tax and legal advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Magnitude, Verante and its representatives receive fees from the provision of financial advice.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Let’s say you have a successful business Widgets Pty Ltd, which is looking for bigger commercial premises to expand but the cost is out of your personal or SMSF budget on their own.

One way you can purchase a property with your SMSF and a related party as co-owners is to establish a unit trust to purchase the property. For this to work you must ensure that the strategy complies with the SIS Act 1993 and in particular Regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 at all times.

Here is a simple practical example of how this strategy works:

Nancy & Colin have an SMSF that has $250,000 that they would like to invest in a commercial property. In their personal names, they also have the ability to borrow $350,000 against their home that they would like to invest in property.

A unit trust is established and their SMSF purchases $200,000 of units leaving $50,000 liquidity in the fund and they purchase $350,000 of the units personally which funds the unit trust with $550,000 in cash and the SMSF owning 36% and Nancy & Colin owning 64%.

The unit trust then uses this money to purchase an Industrial Unit/ commercial property, pay for any purchase costs such as transfer duty and legal fees and maintains some extra funds in a bank account for some liquidity.

The unit trust enters into the lease with Widgets Pty Ltd as tenants, receives the rent and pays the expenses such as rates, insurance and repairs. The net income is then distributed to the unit holders based on their ownership. In the scenario above the super fund would receive 36% of the net rent and Nancy & Colin would receive 64%. Each owner would include their share of the income in their tax returns.

This is called a 13.22C Ungeared Trust and works well for simple scenarios where you wish to buy a property and your SMSF can contribute towards the cost.

Advantages:

The SMSF can in later years later acquire more units from the related party which allows it to increase its ownership of the property. The idea would be to have the property eventually owned 100% by the fund and the money paid to Nancy & Colin for the units is used to pay down their personal loan. This is not possible when a Self Managed Super Fund and related party co-own a property as tenants in common unless it is business real property;

The related party and/or the SMSF can subscribe to new units in disproportionate amounts if more capital is needed for improvements or renovations;

The related party (Nancy & Colin in the above example) can borrow to acquire their units in the unit trust (generally by offering another asset such as their home as security) and then claim the interest on the loan as a personal tax deduction because the trust is income-producing. This effectively allows them to gear their share of the ownership much like they would if they owned it as a tenant in common with the SMSF.

Disadvantages:

The unit trust must comply with the provisions of 13.22c at all times. Any breach of any of the provisions will mean that the trust is subject to the in-house asset rules which limit the value of this investment in the fund to 5% of its assets. This almost always means that the SMSF must dispose of its investment in the trust even if the breach is rectified;

There are additional costs to establish this structure due to the set-up of a unit trust (and corporate trustee if desired);

There are additional costs to run this structure because the unit trust is a separate entity and must lodge a tax return;

SUMMARY OF 13.22c RULES:

To meet the requirements of SIS regulation 13.22C, the trust must:

Be a unit trust;

Have no debt and not allow any security to be taken over its assets;

Have no lease arrangement with a related party other than one relating to business real property;

Not acquire an asset (other than business real property) from a related party;

Not lend money to any entity other than an authorised deposit taking institution (eg, a bank);

Not conduct a business. Therefore, depending on the size and scale of the development, the trustee should consider engaging a third party to develop the land for a fee.; and

Not own an interest in another entity – which means it cannot own shares or invest in another trust.

Broadly, this means the trust will only own residential or business real property and cash on deposit.

Other consequences you may have to consider

Some of the transactions outlined above could have capital gains tax (CGT) implications and

may be subject to duty as the trust may be or in the future become be a ‘land rich entity’ under the various state Duty Acts.

However, with careful planning, these outcomes can be managed in some circumstances. For example:

If the Units are disposed of by the SMSF during pension phase they would generally be CGT-free;

Some of the different States Duty Acts offer concessions in some form or another where there are transactions between an SMSF and its members; and

The related party may be able to utilise the small business CGT concessions when disposing of units in the trust.

Not a strategy to prop up a failing business:

A holding in a 13.22C trust that is not owned by an SMSF may be offered as security for a loan. If this is done, the interest would potentially be available to the owner’s creditors if the business failed.

SMSF trustees who co-invest in such a trust need to consider the risks involved, which could be considerable if the SMSF is a minority unit holder and the trust came to be directly controlled by creditors.

The trustee of the unit trust would need to conduct its affairs on a purely arm’s length basis to avoid audit problems for the SMSF investors including:

Putting in place a lease agreement on commercial terms

Ensuring rents are collected promptly and no leeway uis provided because of the relationship (you need to be as hard or harder than if you were unrelated)

Ensuring proper liability insurance and property insurance is maintained on the property.

As mentioned above if any of the conditions in Regulation 13.22C are not satisfied, the SMSF’s units in the unit trust will be treated as an in-house asset of the SMSF and the in-house exception in Regulation 13.22C cannot be subsequently applied even if the breach is rectified (refer to Regulation 13.22D(3)).

We also refer you to Taxpayer Alert TA 2012/7 where the ATO warns SMSF trustees and advisors to exercise care ensuring any arrangements entered into by a SMSF to invest in property are properly implemented, particularly those involving LRBAs or the use of a related unit trust.

This is a strategy where you must include your Accountant and a SMSF Specialist Advisor to ensure you get the process correct and run the strategy correctly going forward. We are happy to work with your current accountant on any strategies.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

Our copy of our Financial Services guide can be obtained by clicking here or visiting our main www.verante.com.au website.

Years after the 2008 financial crisis and some people have been slow to regain confidence in the share markets and low cash and term deposit interest rates leave them cold. A growing number of people have considered shifting their superannuation to the more self- directed option of a self-managed superannuation fund (SMSF).

Small to Medium Business owners have always been at the forefront of adopting SMSFs and they have been particularly interested in this rapidly growing area for greater control of their superannuation savings and the flexibility of investments allowed in a SMSF structure. However the ability to either transfer their business premises into their SMSF via a contribution or sale, depending on their cash flow circumstances, has been attractive to many business owners.

Current legislation governing SMSFs, the SIS Act, allows a SMSF to acquire only three types of assets from the members or a related party. These assets are business real property, widely held managed funds and listed securities (shares).

Business real property is best defined as “any freehold or leasehold interest of the entity in real property where the real property is used wholly and exclusively in one or more businesses (whether carried on by the business or not).” This definition does not allow much leeway so you should seek professional advice to ensure that your property satisfies the requirements of the “wholly and exclusively” business use test and meets the definition of business real property prior to implementing this strategy

Benefits:

Release equity to build the business – you can access superannuation funds to help fund business growth prior to retirement by way of a cash purchase by the SMSF.

Tax minimisation – the property moves in to the concessionally taxed superannuation environment; 15% tax rate while members are in accumulation phase or exempt from tax when members are in pension phase.,

Asset Protection – to protect the value of the business real property in the event of bankruptcy, litigation or changes to your industry destroying your market.

Build funds for retirement – you have a bricks and mortar investment to boost your retirement funds earning market rent at concessional rates with the ability to avoid any CGT if sold later.

If you are seeking new premises then buying in your super fund allows you the security of tenure that comes with being your own landlord.

Helps in preparing a business for transfer or sale. If the new owner or family members cannot afford to buy the business and the property, you can sell the business premises and lease them the property.

Risks:

You should always ensure the strategy meets the Sole Purpose test of providing for your retirement. It should stack up as a stand-alone investment in its own right.

If your business should fail and you can no longer lease the premises the you are hit with a double whammy with no income in your personal name and possibly an asset that is hard to lease to a new third-party

While it may be a sound investment now, things may change and your company may outgrow the premises leaving you again with a commercial property that may be hard to sell to extract equity for your next move.

Commercial, retail and industrial property is often a good income orientated investment with income well above that available from residential property but rarely sees the same degree of capital growth. You need to be aware of the trade-off and a diversified portfolio should be considered.

Once you are in pension phase you will need to fund pensions so you need to ensure liquidity in the fund. This is fine while rented or you can make contributions but remember if not working after age 65 you cannot make further contributions to help with liquidity.

Transfers of business real property purchased from related parties must be transferred at current market value as if the transaction was to occur on an arm’s length basis. This requirement allows for very little manipulation of the market value and heavy penalties could apply if any transfer value didn’t stand up to audit and ATO scrutiny.

So you have three or more options when it comes to the strategy. Your SMSF can buy the property utilising cash currently within the SMSF as a normal purchase. If your fund does not have enough cash then you can look at using a Limited Recourse Borrowing Arrangement to borrow the shortfall. More details on that strategy can be found here.

Alternatively, you can structure the deal as an in-specie transfer (a contribution of an asset, in this case property, instead of cash). You are still subject to member contribution caps but we have moved properties worth up to $500,000 in for couples and $1,000,000 where the SMSF had 4 members using a combination of concessional contributions limits and the 3-year bring forward rule on non-concessional limits.

You may also be able to use the Small Business CGT concessions in conjunction with a short term LRBA to move a property of up to $1.445,000 in to the fund with careful planning.

The whole deal has been sweetened by the fact that a number of the State Revenue Offices including NSW OSR have allowed concessional stamp duty stamp ($500) on in-specie property transfers whereby no cash has changed hands. This stamp duty saving can make transferring the business premises into a SMSF much more attractive. It should be noted that stamp duty is a state tax with no uniformity between states. Please seek legal advice always when dealing with stamp duty on property transfers and tax advice when moving assets between entities.

Remember the core philosophy behind Superannuation is that they must adhere to the Sole Purpose Test. While a strategy may help your business currently, its primary goal should be to provide for your retirement so the investment should always stand up as a viable investment regardless of your internal lease arrangements.
Check out the most common mistakes people make when dealing with property, borrowing and a SMSF here:

Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

I trained in General Insurance in the UK after my Graduation and much of that time was in the complaints, claims and product design departments. So I know how things go wrong when people take out unsuitable policies or under-insure their properties. 24 years later and nothing has changed, so I have been recommending people use a General Insurance Broker if they are inexperienced, lack confidence or want help and advice about insuring their business, liability or property assets.

That brings me to the title of this blog and I asked my preferred Insurance Broker here in the Hills District of Sydney, who operates countrywide, to explain the insurance requirements for an SMSF buying property

Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums.

If you have purchased property in your SMSF it is important for you to take the correct steps to insure your investment.

If you borrow against the assets in your SMSF the mortgagor will require you to have adequate cover for the asset and for the Liability obligations of the SMSF. If the assets of the fund cover the purchase in full however you are still required as Trustee of the fund to correctly insure the funds interests. The fund is not permitted to “self-insure” any assets or property. The ATO has strict guidelines regarding the duties and obligations of SMSF trustees so it is important to get your insurance program right.

The question arises: who takes out the property insurance and landlord’s protection insurance, the SMSF Trustee or the Holding Trustee? I refer to this content from Towsends Law on the matter

SMSF TrusteeThe SMSF Trustee is entitled to take out insurances for the property as the Fund is liable under the loan and is also absolutely entitled to the benefit of the Property.

As the Fund is ultimately the party that is detrimentally affected should anything happen to the Property, the SMSF Trustee should ensure that the Fund is able to claim for any damage that might occur.

Holding TrusteeThe Holding Trustee is the legal owner of the land and is entitled to insure the property against damage, and likewise for landlord insurance. Some lenders may also insist that the registered proprietor of the property holds an insurance policy for the property.

But it is important to keep in mind the nature of the arrangement between the SMSF Trustee and Holding Trustee should insurance be taken out by the Holding Trustee.

As the Holding Trustee is a bare trustee it must make sure that it does not take any action unless it is directed to do so by the Fund Trustee, who is absolutely entitled to the Property. This direction by the Fund Trustee should be done formally and in writing and confirmed by the Holding Trustee executing minutes to confirm this action.Final DecisionThe final answer is that both the Holding Trustee and the SMSF Trustee have an insurable interest in the land and that both are eligible to be the owner of the property insurance and landlord’s protection insurance over the property.

In both instances all amounts payable in respect of the insurance should be paid by the Fund Trustee. Obviously the Holding Trustee must hold any policy proceeds on trust for the SMSF.

From a purely administrative position it would be easier for the SMSF to hold the insurances to avoid the constant but mandatory interplay between the SMSF and its bare trustee the Holding Trustee. But the insurance company may have its own requirements as might the Fund’s Lender.

So our preference is to have all insurances for the SMSF in the name of the fund. You cannot have personal items or assets listed on a policy in your funds name, and likewise you cannot have your fund’s assets listed on a personal policy for some of your personal assets.

As with all insurances, you really do get what you pay for. The more optional extras you include in your policy the more protection you will have. Let’s go through a fairly standard Landlords Insurance policy and give some simple definitions of each section. Like your personal household insurance policy your landlord’s policy will have cover for both your Building and for your Contents. These are fairly standard; however it is important to read the definitions to determine which items come under which section of cover. You may be in for a surprise if you haven’t studied the wording properly.

Where a Landlords Insurance policy differs in comparison to your standard household insurance is in the additional covers offered.

Loss of Rent – This is to cover your lost income if you have a claim under your building and contents cover, and the property becomes uninhabitable as a result.

Strata Title Mortgagee’s Protection – This covers the mortgagee named in the Schedule as if they were “You” on the same terms as Section1 against physical loss or physical damage caused by any of the Defined Events (it does not include the Additional Benefits).

Deliberate Damage and/or Theft by Tenants – Cover for physical damage arising from deliberate, intentional or malicious acts and acts of theft to the Building or Contents by the Tenant.

Tenant Default – This cover if for loss of rent, payable by the Tenant, which arises from damage covered under the Deliberate Damage/Theft by Tenant section above or from breach of a written Lease agreement.

Chances are you’ve worked hard at acquiring your assets and building your Super for your retirement. Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums. Instead you will be hoping your insurance policy will respond to your claim.

If you’re at all unsure on what you need, talk to an Insurance Broker. If you don’t know an insurance broker, then speak to the people you trust with your Investments and your accounts because they should be able to put you in touch with an Insurance broker they trust.

For more information please don’t hesitate to contact me.

The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services from Insurance brokers, we just want the best professional advice for our clients.

For more detail on Investing in Property through an SMSF check out our previous articles

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Question received:

Hi Liam

You recently mentioned that you it’s possible to do construction within a SMSF where there could be draw downs? Did you do an article on this somewhere that I could research?

Answer:

The following is general advice only and you should get very specific advice on your own proposed strategy before spending any money on implementing these strategies. Do not rely on general information in an article to put in place any strategy.

I wrote a general article on purchasing House and Land Packages which is linked at the end of this article. But to address the matter of draw downs in specific I will deal with it here. Yes you can engage in construction of a property under a LRBA (Limited Recourse Borrowing Arrangement) or Super Fund Borrowing as it is commonly know. It is also possible to have progress payments if the LRBA is structured properly.

The ATO provides example 10 in SMSFR 2012/1, which concerns the purchase of a house and land package by a SMSF under a LRBA. The ATO had said in that example that “because the contractual arrangement is for the acquisition of land with a completed house on it, and settlement occurs once construction of the house is finished, the deposit and the payment on settlement can be funded under a single LRBA.

This was followed up by a request for more details in a National Tax Liaison Group (NTLG) Superannuation Technical Sub=group meeting in December 2012 where they were asked to confirm more than 2 payments could be made, so not just deposit and final settlement payment but progress payments.

So they confirmed that it does not have to be only two payments. There can be multiple progress payments under the one single LRBA HOWEVER only if the terms of the LRBA allows the SMSF trustee to make multiple draw-downs for that purpose or if the SMSF funds the progress payments from its own funds.

You should also read the March 2013 minutes Section 7.5 Limited recourse borrowing arrangements and the payment of deposits. Please note NTLG minutes are for guidance by the ATO and are not binding rulings so get personalised advice..

So in summary:

The non-negotiable components of a successful LRBA for a House and Land package must include:

the single acquired asset is at all times a completed house and land, and

the security for the loan is at all times over the land and completed house, and

the LRBA must allow drawdowns for the deposit, progress payments and settlement.

As this is a very specialised process and requires specific wording to the LRBA agreement you need to work with a SMSF Specialist Advisor, experienced Mortgage Broker and a Lawyers who know how to draft personalised documentation. Do not trust a bank to provide all the documentation on a loan like this as they will only be interested in protecting their interest and that may not provide you with the documentation to meet the Section 67A exemptions.

It may be better to consider arranging a loan with an offset account (never a redraw facility as that would breach the rules) that is draw down in full initially and the excess stored in the offset account and used to fund the progress payments as the build progresses.

Why not click here to Schedule a Meeting by phone, face to face or via Skype if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

I openly admit that I am not an expert in choosing properties (indeed my own personal history with property investing is dismal to say the least!). I work on the structure and strategy with my clients and recommend they do their own in-depth property research or lately I have been recommending people use a Buyer’s Agent if they are inexperienced or lack confidence or want help and advice but need to know that person is working 100% on their behalf.

“Empowering clients to make the right choices!” –

Louis Fourie Property Advisor & Buyers Agent

Searching or looking for a home to live in or investing in property, could at best be an intimidating experience. You wouldn’t invest half a million dollars in a business without a strategy or without a business plan, then why would you invest that, or even more, into a property without a plan or strategy? With a process of consultation we determine what clients really need to reach their own personal property goals. Through step by step professional guidance we determine a strategy suitable to our clients needs and finally implement that strategy, finding the home or investment property that credibly suits the designed and agreed personal property strategy.

Why use us as your Property Investment Advisor and Buyers Agent:

We work exclusively for the Property Investor/Home Buyer. We have no alliances with any real estate agencies, selling agents or property developers and we fight for our buyers! There’s a clear distinction between our services and those of selling agents. We don’t sell property, have no ‘stock lists’ and as exclusive buyer’s agent, we only act for the buyer not the seller.

We give our clients choice and by doing independent research and providing professional guidance, we empower our clients to make the right choice and purchase their ideal property at the right price. You don’t have to rich and famous to use our services. We will save you money, time and stress, whatever your budget.

We save our clients heartache. No more the need to try to figure out if my friends ‘advice’ at the BBQ to invest in that ‘hot’ area is credible or not! Believe it or not, but 80% of mistakes that’s made in investing in real estate are made at the buying stage.

We are a fee for service organization and any potential commissions, discounts or fees that we could get back for our clients from developers or vendors; we diligently negotiate back for our clients as far as its possible, often resulting in our clients getting much better return in dollars than what they paid us for our professional services in the first place! This saving could often run into the tens of thousands of dollars or much more. We absolutely do not accept any sales commission or incentives from vendors, builders or developers. We are truly independent.

We will not refer our clients to service providers that don’t have their best interest at heart. We have created a safe environment for property buyers with like-minded people all focused not on: ‘What’s in it for me’, but on: ‘What’s in the best interest of my client’.

We carry appropriate and adequate Professional Indemnity insurance for the services we provide and are fully licensed real estate agents.

Why not build your property portfolio on good foundations? Make your next property acquisition an informed one.

The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services like Louis’, we just want the best professional advice for our clients.

For more detail on Investing in Property through an SMSF check out our previous articles

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Living in Sydney and I have many clients who dream of retiring up or down the coast or inland to more suitable and often slower paced areas of Australia.

Many plan to downsize and sell their Sydney home in retirement and purchase a place on the coast. The issue that arises is that they often feel they have identified the area or actual property they want to live in during retirement and want to secure it now. Others are afraid that the selected area will be priced out of their budget in future years with so many baby boomersretiring over the coming decades.

So here is a solution we used for a few of our clients wanting to plan ahead and reduce that risk.

Jeff & Joan (of course it’s not their real names!) came to see me in 2006 and they had a lovely house in Hills District of Sydney but it was 2 storeys and with Jeff’s knees playing up they knew that they would need a single level property later. Also they planned to move to Lake Macquarie to be nearer their children and hopefully future grandchildren in Newcastle in retirement.

They could not borrow to buy a property in their own names as they had business and family commitments that reduced their borrowing capacity.

They had a decent sized SMSF and could afford to buy a property as part of their diversified strategy so we put this strategy to them.

They identified a property they would like in Lake Macquarie that ticked all the boxes and was currently tenanted. We revised the SMSF Investment strategy and put the trustees reasoning for investing in residential property and the projected returns and maintained a diversified investment portfolio with the other funds. We also looked at options and exit strategies as part of the analysis and the investment stood up as a sound one for their portfolio.

There SMSF purchased the property in early 2007 for $400,000 and it was a sound investment over the following 5 years providing a reasonable rental income and about 3% capital growth per year over that time which was decent for a single level property just one street back from the water.

In 2012 Jeff decided to retire and Joan agreed to reduce her hours. They put their house in Castle Hill on the market and gave the Lake Macquarie Tenants 4 months notice which they felt was fair. Their Sydney property sold a few months later for $850,000.

We got a professional valuation on the Lake Macquarie property and it was valued between $480,000-$500,000, so we agreed a market value of $490,000. The couple elected for a lump sum pension commutation from their SMSF paid “in-specie” as the Lake Macquarie property from their Self Managed Super fund and because it was in NSW they did have to pay Stamp Duty on the transfer. I believe on Victoria and WA there are exemptions that apply on such transfers as long as it is the same Beneficial Owners after the transaction. We sought legal advice here in NSW and were unable to get this concession.

The couple then used $150,000 to renovate the property and kept $150,000 in Term Deposits in their own name. This left approximately $500,000 which they contributed as Non-Concessional contributions equally to the SMSF.

What were the benefits?

Secured their choice of future retirement home earlier. The relief of having this certainty should not be underestimated by advisers.

They did not over extend their personal debt which would have left them very exposed during a downturn in their business from 2008-2010

Rental income from 2007 to 2012 was taxed at only 15% rather than their higher marginal rates.

Secured a $90,000 tax-free gain on the investment property as they were in pension phase.

Turned their superannuation accounts from mostly a Taxable component to accounts with more than $250,000 each of non-concessional components and Tax Free to their adult children as part of their Estate Planning.

Oh and they missed the GFC effect on this portion of their investments!

Downside:

Yes we had to pay Stamp duty but that was highlighted from the start as a possibility

The house prices did not run away from them in Lake Macquarie but at least they were not worried.

I must also mention a comment the clients made in their latest review and that was that in the 12 months since they moved they have not seen an alternative property, that would have suited their needs so well, come on the market so the advanced planning worked in their favour. Oh and they now have 2 grandchildren that they look after 2 days per week while enjoying the Lake Macquarie lifestyle they wanted.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember. So to learn more about money and finance at our Financial Knowledge Centre is a great place to start.